Academic journal article ABA Banking Journal

Small Banks like Third-Party Mortgage Option

Academic journal article ABA Banking Journal

Small Banks like Third-Party Mortgage Option

Article excerpt

If there's one thing community bankers can't stand, it's watching their customers go elsewhere for services their bank can't provide. Fickle customers may be a fact of life in some urban markets, but loyalty is prized in places like Milledgeville, Ga., about 60 miles southeast of Atlanta.

That's the home of First National Bank of Baldwin County, with $36 million in assets. The bank hadn't offered residential fixed-rate mortgages until joining a third-party mortgage service in early 1991. The bank did offer what it calls in-house mortgage loans, such as a balloon note based on a 20- or 25-year payback. But it came up short on products like fixed-rate fully amortizing loans, partly due to the cost of establishing ties to the secondary mortgage markets, Fannie Mae and Freddie Mac.

"Since the bank opened [July 1989], new customers have come in one to three times a week requesting a fixed-rate mortgage," says Donna Segars, banking/compliance officer at the bank. "The president and vice-president of the bank were the only two lenders [early on], and we were sending our customers to our competitors." Today, Segars, with 15 years of lending experience, is responsible for mortgage originations, the Visa credit card program, and CRA compliance at the bank. Although new mortgage loan demand is "average" at the bank, she notes, there's plenty of work for one person, particularly with the wave of refinancing that swept the country when interest rates dropped recently.

Third party option. To broaden its mortgage options and increase efficiency, the bank turned to a third party mortgage servicer, which many banks find is the key to keeping account business at the bank without establishing a new lending operation. The bank now offers mortgages through the Open House residential mortgage referral service from Gulf States Mortgage Co., Inc., Atlanta, a subsidiary of Citizens Financial Group, a $4 billion-assets holding company based in providence, R.I. Gulf States' loan servicing portfolio covers 40 states and exceeds $1.8 billion, with annual loan origination totalling over $400 million. Two similar servicers are Wendover Funding, Greensboro, N.C., and Countrywide Servicing Exchange, Pasadena, Calif.

The Open House program allows community banks to offer their customers fully amortizing residential first mortgage products at competitive rates without committing bank funds or excessive time to the transactions.

Gulf States allows the banks to market the loans under bank-chosen names, and the banks become exclusive agents for the loans in their local markets. A Bank Services division of Gulf States provides member banks with marketing materials and administrative support and assumes responsibility for loan approval, coordination, and, once the mortgage is closed, processing.

"Two kinds of banks use the Open House program," says David Bauer, director of Gulf States' Bank Services division. "The majority is banks that for one reason or another have made the decision not to offer 15- or 30-year mortgages." These banks are spared the time and cost constraints associated with handling more complex mortgage offerings. "They end up spending just 30 or 45 minutes coaching the customer through the application," says Bauer, and then hand it off to us."

A second group of banks using Open House are those familiar with offering 15- and 30-year mortgages, says Bauer, "but who have decided that they can make just about as much money doing it our way. …

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